Cross References
- JCX-4-13, Joint Committee on Taxation, February 11, 2013

As Congress debates ways to reduce the federal deficit, some lawmakers have suggested making changes to the tax code as a way to increase revenue. The House Committee on Ways and Means recently held a public hearing entitled “Tax Reform and Charitable Contributions.” A report prepared by the Joint Committee on Taxation was considered at that hearing and provides background information and numerous proposals by members of Congress who want to change the way charitable contributions affect the individual tax liability of taxpayers. The following information includes the proposals that lawmakers may consider in future tax reform legislation.

The federal income tax charitable deduction dates back to 1917 and has remained a feature of the income tax system throughout its history. The Internal Revenue Code allows taxpayers to reduce their income, estate, and gift tax liability with deductions for gifts to certain organizations.

Charitable giving by individuals, foundations, estates, and corporations reached $298.42 billion in 2011, of which individuals gave $217.79 billion, foundations gave $41.67 billion, estates gave $24.41 billion, and corporations gave $14.55 billion. These figures represent estimates of the total amount of donations made to charity during 2011.

Of the $298.42 billion given for 2011, $95.55 billion (32%) was given to religious organizations, $77.7 billion (26%) was given to organizations that promote the arts, the environment, and certain international organizations, $38.87 billion (13%) was given to educational organizations, $35.39 billion (12%) was given to human services organizations, $25.83 billion (9%) was given to foundations, and $24.75 billion (8%) was given to health organizations.

Many charitable organizations rely on charitable donations to finance their operations, and the charitable contribution deduction plays an important role in providing such support. The deduction for charitable contributions reduces the economic cost of making a donation and thus encourages charitable giving. The after-tax cost of giving is the value of the gift net of the amount of any tax benefits received. For example, for every dollar given to charity by an itemizing taxpayer in the 28% marginal tax bracket, the after-tax cost of giving that dollar is 72 cents ($1 – $0.28). Empirical studies generally support the proposition that taxpayers respond to tax incentives when making giving decisions. In other words, taxpayers increase donations as the after-tax cost of giving decreases, and they decrease donations as the after-tax cost of giving increases. The strength of this price effect can have significant policy implications if, for example, the loss in federal revenue Congress Considers Changes to Charitable Contribution Deduction continued from allowing the charitable deduction is greater than, or less than, the increase in charitable giving caused by the deduction. A number of economic studies have examined the strength of this price effect, with differing results.

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